2022 (1) TMI 1424 - AT - Income Tax

Addition under the head capital gains from sale of equity shares held by the assessee - FMV determination - value of leasehold interest in land - residual ownership rights were transferred in favour of person (who was the state subject i.e. resident of Jammu Kashmir) - whether the value of leasehold interest in the land is to be included to determine the fair market value of each share on 1.4.1981? HELD THAT - Assessee‟s were shareholders of M/s Jyoti (P) Ltd., who undisputedly owned the hotel building which stood on the land owned by Shri Vikramaditya Singh one of the shareholder, who had become the owner of the land by virtue of the partition of the family properties and the land falling to his share had in fact been leased out by him to the company, M/s Jyoti (P)Ltd. We find force in the arguments of assessee that since in the state of Jammu and Kashmir no person other than the resident of the state can own the land, the title to the land stood in the name of Shri Vikramditya Singh and even the Hotel Building would have no independent value, if the land on which the building stood is not considered. We find from deed of lease dt. 21.3.1973 that at the time when M/s Jyoti P. Ltd., had purchased the building by another deed of relinquishment on 21.3.1973, the Hotel Building was already existing on the land so leased and as such virtually it was a case where M/s Jyoti P. Ltd., had an absolute interest despite the fact it was only where the title of the land remained in the name of Shri Vikramaditya Singh. We find even the residual ownership rights were transferred in favour of Sh. Narendra Batra (who was the state subject i.e. resident of Jammu Kashmir), who was a nominee of Bharat Hotels Ltd. on 16.1.1998 for a nominal value of Rs. 10 lacs when Perpetual Lease Deed was granted in favour of M/s Jyoti (P) Ltd. We, therefore, find merit in the arguments of assessee that virtually Shri Vikramditya Singh had divested his rights title and interest in respect of the aforesaid land as early as from 21.3.1973 and for all practical purposes the land was considered to be the property of the company. Since under the state laws of Jammu and Kashmir any immovable property could not be owned by a person who is not a resident, only title of the property remained in the name of Shri Vikramaditya Singh. It is true that, lessee had only disclosed the value of the building in its Balance Sheet, despite the fact that it had also acquired and held lease hold rights. We find as on 1.4.1981 un-expired period of lease was 32 years as the lease granted was to expire only on 20.3.2013. In order to determine the fair market value of each share as on 01.04.1981, it is necessary to adopt the aggregate of fair market value of the assets which would obviously include the value of leasehold interest in the land. In CWT vs. PN Sikand reported in 1977 (4) TMI 1 - SUPREME COURT had held that an asset also consists of leasehold interest in a land and should be included in the valuation of such leasehold interest in the land. Similar view has also been taken in the decisions relied on by Ld. Sr. Counsel for the assessee in the case law compilation. Thus we hold that while adopting the fair market value as on 01.04.1981, the value of leasehold interest in the land be also held to be included in the value of asset of M/s Jyoti Private Limited, so as to determine the fair market value of shares held by the sharesholders. The lease hold interest in the land is an asset of company and is capable of valuation. That the assessee had made no capital gain and the method of valuation adopted under the Wealth Tax Act is not applicable, while arriving at the fair market value of shares as on 01.04.1981 for the purpose of section 55(2)(b)(ii) of the Act. The various decision relied on by Ld. Special Counsel for the Revenue are distinguishable and not applicable to the present case. Accordingly, the order of the Ld. CIT(A) on this issue is upheld and the grounds raised by the Revenue on this issue of Capital Gain are dismissed. Characterization of income - correct head of income - agricultural income or income from other sources - assessee could not substantiate its agricultural income and the assessee was not showing any agricultural income in the past years - CIT(A) deleted addition - HELD THAT - The assessee before the Assessing Officer as well as the Ld. CIT(A) had filed the details of agriculture produce and the details of sale etc. It is also submitted before the Ld. CIT(A) that the apple and Cherry trees which were planted before three four years earlier had started giving fruits during the year and therefore the assessee has shown agricultural income from this year. Merely because the assessee had not shown agricultural income in the past, in our opinion, cannot be a ground for rejecting the claim of agricultural income during the impugned year especially when the assessee had filed the details of agricultural land and the receipts of the buyers who had purchased the apple and cherry. We, therefore, uphold the order of the ld. CIT(A) on this issue and the ground raised by the Revenue on this issue is dismissed. Validity of reassessment proceedings - income declared by the assessee in the invalid return has escaped assessment in terms of section 147 - HELD THAT - Since, such income has already been offered to tax and due taxes have already been paid, therefore, pre-requisite before the issuance of notice of escapement of income on 10.01.2001 being not satisfied, assumption of jurisdiction u/s 148 of the Act and consequent assessment order passed in our opinion is unsustainable in law especially when there was time available with the AO to complete the assessment u/s 143(3)/144 upto 31.03.2001. Further, the Assessing Officer in the order passed u/s 143/147 of the Act has brought to tax a sum by way of capital gain which was not the ground of reopening of the assessment. Therefore, we agree with the contention of the ld. Sr. Counsel for the assessee that such addition made in the assessment order is unsustainable in law in view of the decision of Ranbaxy Laboratories Ltd. 2011 (6) TMI 4 - DELHI HIGH COURT and Jet Airways (I) Ltd. 2010 (4) TMI 431 - HIGH COURT OF BOMBAY Reopening of the assessment in the case of Dr. Karan Singh and other two assessees - We find the proceedings u/s 148 of the Act was initiated after a period of four years from the end of the relevant assessment year. The entire basis on which the proceedings had been initiated u/s 147 of the Act in the case of the three assessees was on the basis of the findings recorded by the A.O. in the order of assessment dated 26.03.2002 in the case of Mr. M.K. Ajat Shatru Singh, such findings had ceased to remain valid findings when the learned CIT(A) had held that no gain had accrued to the assessees. Therefore, such reopening of assessment after the order of the Ld. CIT(A) holding that no gain had accrued to the assessees in our opinion makes the reassessment proceedings unsustainable in law since the foundation on which the structure was proposed did not exist.

Summary

Issues Involved:
1. Validity of reassessment proceedings under section 147/148 of the Income Tax Act.
2. Determination of capital gains on the sale of shares.
3. Treatment of agricultural income as income from other sources.

Issue-Wise Detailed Analysis:

1. Validity of Reassessment Proceedings:
The primary contention was whether the reassessment proceedings initiated under section 147/148 of the Income Tax Act were valid. The assessee argued that the reassessment was invalid since the income of Rs. 5,85,071/- declared in the original return had already been offered to tax, and thus, there was no "escaped assessment." The Tribunal agreed with this argument, noting that the foundational condition for reopening the assessment was not met. It was emphasized that the reassessment proceedings could not be based on the same income already declared and taxed. Furthermore, the Tribunal cited the decision in Ranbaxy Laboratories Ltd. v. CIT, which held that additions made in reassessment must be based on the reasons recorded for reopening. Since the capital gain addition was not part of the reasons for reopening, it was deemed unsustainable.

2. Determination of Capital Gains:
The core issue was the computation of capital gains arising from the sale of shares in M/s Jyoti Private Limited. The assessee argued that the fair market value of the shares as of 01.04.1981 should include the value of leasehold interest in the land, which was not considered by the Assessing Officer (AO). The Tribunal upheld the assessee's method of valuation, which included the leasehold interest in the land, as the correct approach. The Tribunal noted that the fair market value should be based on the price the asset would ordinarily fetch in the open market, as defined under section 2(22B) of the Income Tax Act. The Tribunal dismissed the Revenue's contention that only the book value of assets should be considered, as the Wealth Tax Act's valuation rules were not applicable for computing capital gains under the Income Tax Act. The Tribunal also highlighted that the AO's approach of excluding the leasehold interest was incorrect, and the CIT(A)'s acceptance of the fair market value including the leasehold interest was justified.

3. Treatment of Agricultural Income:
The AO had treated the agricultural income of Rs. 1 lakh declared by the assessee as "income from other sources" due to the lack of past agricultural income declarations. The Tribunal upheld the CIT(A)'s decision to treat it as agricultural income. The Tribunal found that the assessee had provided sufficient evidence of agricultural activities, including the planting of apple and cherry trees and the sale of produce. The Tribunal noted that merely not declaring agricultural income in previous years could not be a ground for treating the current year's agricultural income as income from other sources, especially when supported by evidence.

Conclusion:
The Tribunal dismissed the Revenue's appeals and upheld the CIT(A)'s orders, which included the deletion of the capital gains addition and the acceptance of agricultural income. The Tribunal also allowed the cross-objections and the ground raised under Rule 27 by the assessees, challenging the validity of the reassessment proceedings. The decision emphasized the importance of adhering to the statutory definitions and provisions while determining the fair market value and the necessity of valid grounds for reopening assessments.